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We reveal the stock markets offering the juiciest source of income and best ways to invest
Thursday 01 Jun 2017 Author: Emily Perryman

Fed up with the low dividends offered by the UK’s largest companies? Why not look further afield as some overseas markets offer dividend yields of above 5%, as we now reveal.

Figures produced for Shares show there are several countries around the world offering far superior yields than the UK’s main stock market index, the FTSE 100.

With a current yield of 3.8%, the UK doesn’t even make the top 10 – unless the results are filtered to show developed markets only.

Top of the chart is Slovenia, with a juicy dividend yield of 6.2%. In second and third place are Australia and New Zealand, both of which yield 5.3%.

Close behind are three emerging markets: Russia (5%), Czech Republic (4.9%) and the United Arab Emirates (4.5%).

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Why do the yields vary?

There are lots of reasons why dividend yields vary. For countries like Slovenia, Russia, Czech Republic, Finland and Norway it’s largely to do with the fact that their stock markets are dominated by state-controlled enterprises. These types of companies like to reward investors as they are often very reliant on their support.

‘For example, Russia is 60% dominated by gas and energy companies, which are bloated enterprises that are controlled by the state,’ says Viktor Nossek, director of research at WisdomTree Europe.

‘They aren’t sufficiently funded by the government so they need to fund themselves through the equity market. They offer high dividend yields to attract investors.’

The Czech Republic is dominated by one telecoms stock, CEZ. It has a 19% weight in the Prague Stock Exchange and a forward dividend yield of more than 5%.

‘Investing in the Czech Republic stock market is almost an individual stock proposition,’ says Nossek.

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Local investor preference

Even when these state-dominated markets are excluded, there is still a big gap between the lowest and highest yielding countries.

Reasons include local investor preference, market governance and what types of companies make up the index.

Russ Mould, investment director at AJ Bell Youinvest, says investors in the US prefer share buybacks to dividends so the yield from US-listed companies has always been relatively low.

‘Countries where governance and minority shareholders have been less of a concern, such as Japan and Korea, have also offered lower dividend yields, although both of these nations are now showing some improvement,’ he adds.

The Australian ASX-200 index is dominated by high-yielding bank stocks, so it carries a high yield overall.

New Zealand has a large number of companies in the utilities and telecom services sectors, where earnings growth is relatively limited and the bulk of total returns can come from the dividend.

 

Many companies in places like Russia are dependent on shareholder support as they get limited funding from Government, hence they pay generous dividends to attract investors.

Russia 465880111 (TS)

 

How can I get exposure?

One of the simplest ways to get exposure to markets around the world is to invest in exchange-traded funds (ETFs).

There are ETFs targeting a single country, such as iShares MSCI Australia UCITS ETF (SAUS). Offering exposure to 70 stocks, this ETF returned 21% in the 12 months to 31 March 2017. The ETF is accumulating, which means dividends are reinvested back into the fund rather than paid to you in cash.

Single country ETFs tend to concentrate on developed markets. If you want to invest in a frontier or emerging market you’d need to consider a broader product like iShares Core MSCI Emerging Markets Investable Market Index ETF (EIMI). It offers exposure to countries like China, South Korea, Taiwan, India and Russia.

If you’re unsure in which market to invest you could look at ETFs with global coverage. For example, Vanguard FTSE All-World High Dividend UCITS ETF (VHYL) is designed to target high-yielding companies around the world. The product offers a yield of 3.1% and tracks nearly 1,200 stocks, including oil and gas corporation Exxon Mobil, pharmaceutical company Johnson & Johnson and banking giant Wells Fargo.

Don’t just look at dividend yield

It’s important not to focus too much on dividend yield when deciding where to invest. You should also think about whether the country offers good value and has decent prospects.

Mould suggests looking at the market’s dividend cover ratio, which shows how much profit the companies are making relative to the dividends they’re paying out.

‘If cover is low and profit falls, then dividends could be cut as companies hunker down to see out the downturn,’ he says.

Another factor to consider is dividend growth. Andrew Wheatley-Hubbard, co-manager of the BlackRock Global Income Fund (GB00B3VXK756), says dividend yield and dividend growth drive over 80% of equity returns over the long-term.

‘It is not enough to focus just on today’s yield to improve returns. It is about understanding where the yield might be in years to come,’ he adds.

With that in mind, you may wish to look at WisdomTree Eurozone Quality Dividend Growth UCITS ETF (EGRA) which selects stocks based on their growth and quality characteristics. Companies being tracked by the ETF include software provider SAP, semiconductor specialist ASML, consumer goods giant Unilever (ULVR) and aerospace company Airbus.

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The importance of total yield

Andrew Walsh, head of ETF sales, UK & Ireland at UBS, argues that instead of purely focusing on high dividends, investors should also seek exposure to companies that undertake lots of share buybacks.

He says this gives a more balanced sector exposure because there are certain sectors that focus on paying dividends and others that concentrate on share buybacks.

You can combine the two strategies via the UBS ETF Factor MSCI EMU Total Shareholder Yield UCITS ETF (UD05), which focuses on the Eurozone.

As well as screening for dividends and share buybacks, the index tracked by the ETF excludes companies that increase their debt to pay dividends. You would get exposure to such stocks as chemical producer BASF, pharmaceutical company Sanofi, insurer Allianz and telecoms provider Telefonica. (EP)

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